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Speeches & Testimony

Remarks by FDIC Chairman Sheila Bair at the Quarterly Banking Profile Press Conference; FDIC Headquarters, Washington, DC
November 25, 2008

For charts referenced in the remarks, please visit:

Good morning everybody. Thanks for coming.

I'll make a few comments about the third quarter industry results, and then give an update on our efforts to boost liquidity in the banking system and to curb home foreclosures. It's not news to any of us that we've had profound problems in our financial markets that are taking a rising toll on the real economy. Today's report reflects these challenges.

[CHART 1 – earnings]

As we had expected, industry earnings for the third quarter were substantially below the prior year, totaling $1.7 billion.

  • This is the second weakest quarter for insured institutions since 1990.
  • And while many large institutions are continuing to post losses due to weaknesses in their portfolios, we're now seeing losses spread to a growing number of smaller institutions.

[CHART 2 – percentage of institutions with net losses]

You can see in this chart that almost one-in-four institutions reported a net loss for the third quarter.

  • That's more than double the proportion of institutions that were unprofitable a year ago.
  • Declining asset quality is the main reason for the weakness in earnings.

[CHART 3 – factors affecting earnings]

As you can see in this next chart, provisions for loan losses are dramatically higher than they were a year ago, exceeding $50 billion for the second straight quarter, representing an almost $34 billion increase over third quarter 2007.

  • Asset quality continued to deteriorate as it has since 2006.
  • This erosion has been concentrated in two major loan types – residential mortgages, and construction and development loans.

We've been saying for some time that the rising tide of troubled loans means that bad loan expenses will remain high. There is nothing in these results that alters that basic message.

[CHART 4 – growth in troubled loans]

Many institutions are aggressively growing their reserves. But overall reserve growth continues to lag behind the growth in troubled loans.

  • Losses from these troubled loans are rising steadily, driven by souring consumer loans such as mortgages, home equity lines, and credit cards.

[CHART 5 – composition of quarterly charge-offs]

As you can see in this final chart, losses on commercial loans are rising as well.

At this stage of the credit cycle, loan performance problems are spreading to a much wider range of lenders and categories of loans. This trend is linked to a weakening economy and uncertainty in financial markets.

Let me say a few words about the performance of community banks. Smaller banks ... those with assets of under $1 billion ... are beginning to show stress similar to the industry as a whole. Still, capital levels among these banks remain higher than the industry average. And combined with their strong retail deposit base, community banks are traditionally a steady source of credit for Main Street America.

So it's essential that these banks have full opportunity to participate in Treasury's capital purchase program. And we strongly urge them to take advantage of this program, and the FDIC's temporary liquidity guarantee program.

The economy and liquidity

Recently, as the economic picture has deteriorated, we've seen problems spread more widely across bank balance sheets. We anticipate that a challenging credit environment will persist for some time to come. But we also need to recognize that financial markets are driven by expectations. Things are rarely as good as they appear in good times ... nor as bad as they appear in bad times.

Concerns about the economy and the size of losses in bank portfolios have contributed to wide and volatile credit spreads ... as well as to liquidity problems for some prominent institutions. The FDIC, Treasury, and Federal Reserve have taken a number of coordinated actions to stabilize financial markets and institutions.

The most recent came over the weekend when the government provided assistance to Citigroup. This assistance was given to ensure the bank's access to funding, and to prevent a more serious problem in financial markets. We continue to make steady progress in returning money and credit markets to a more normal state.

But we must be patient and give these programs time to work. The rules for the FDIC's liquidity program, for example, were just finalized last Friday. I'm confident that the industry will take full advantage of this guarantee program. We remain committed to using all of our resources to preserve the strength of our banking institutions, to promote the process of repair and recovery, and to manage risks.

Bank failures & DIF status

So far this year, there have been 22 failed institutions. Nine of these failures occurred in the third quarter, including Washington Mutual, which was the largest failure in our 75 year history. In recent months we have acted to resolve or provide assistance to some very large institutions. In so doing, we've been able to employ a number of different tools to minimize the costs to the deposit insurance fund.

Nonetheless, as expected, provisions for current and future failures have resulted in a drop in the deposit insurance fund. The fund stood at just under $35 billion at the end of September. The balance may decline further until the higher premiums that we've proposed kick in next year. And while we expect more banks to fail, we believe that this new revenue will put us on track to stabilize the insurance fund, and begin moving it back toward our target reserve ratio. The bottom line is that we have a wide variety of tools and resources at our disposal, and the full-faith-and-credit of the U.S. government stands behind all our obligations.

Problem list

The number of banks on the problem list as of September 30th stood at 171, and their combined asset value was $116 billion.

The upward trend in problem banks reflects the challenges many institutions are facing in this environment. But let me emphasize that -- even amid these adverse conditions -- most banks remain well-capitalized, profitable, and sound.

Loan mods

Before ending, I would be remiss if I failed to mention our efforts to reduce foreclosures. We've made a lot of progress at IndyMac Federal Bank as most of you know. Last week, we incorporated the same model we use at IndyMac into the agreements negotiated in U.S. Bank's acquisition of Downey Savings and in the assistance package provided to Citigroup.

We strongly believe that our loan mod program can work at many other institutions. Last Thursday, we released a how-to guide based on the IndyMac program that we're calling "Mod in A Box." It's free. We're giving it out to banks, loan servicers, non-profits, anyone who has a stake in the mortgage industry. Thank you. I'd be happy to take your questions.


Last Updated 11/25/2008

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